11/10/2011 02:56 EST | Updated 01/09/2012 05:12 EST

IMF head says Europe needs 'political clarity' about bailout plan to reassure investors

BEIJING, China - The head of the International Monetary Fund said Thursday that European governments need to show political clarity about the handling of their debt crisis to reassure lenders and investors.

Christine Lagarde said clearer direction about leadership of Europe's response to the financial crisis would help to encourage financial stability.

Legarde was in Beijing for talks with Chinese leaders but declined to discuss a possible contribution by Beijing to a European bailout.

She said developing countries have offered to contribute to the IMF but don't want the money specifically directed to Europe.

"We don't really understand who is going to come out as the leader, and right now I think that that confusion is completely conducive to volatility. So from my perspective, as a lender, as the IMF, political clarity is conducive to more stability," Legarde told a news conference.

She cited Greece and Italy, where she said such clarity was "much needed" to reassure investors.

Worries about what will happen next in Greece have deepened with the breakdown of talks aimed at creating a power-sharing government to prevent the country from slipping into bankruptcy.

The chaos has spilled into already unsteady Italy, where the key borrowing rate spiked at a dizzying high of 7.4 per cent.

Investors fear Italy might follow Portugal and Greece into begging for a bailout from its partners in the euro. But Italy's euro1.9 trillion ($2.6 trillion) debt is far too great for Europe to cover.